Select Page

The ultimate goal is to convert Vale (VALE), the global iron ore producer, into a true corporation from its current status as a company controlled by a shareholder group consisting of Brazilian pension funds, Brazilian bank Bradesco, and Japan’s Mitsui. This transformation would remove worries that Vale, possibly the most important Brazilian company after Petrobras (PBR), runs its business to suit the government instead of its private shareholders. With Brazil locked into a corruption scandal that has already brought down one president and that now threatens another, removing worries about government manipulation would do nothing but good for the stock.

Vale is a member of my long-term 50 Stocks portfolio. The New York traded ADRs closed at $8.74 today. The 52-week range has been from $4.68 to $11.70. The ADRs have been in a downtrend since February until recently–hitting $7.77 on June 10– from the February 17 high at $11.15. A move up above $11.15 would end that downtrend by setting a higher high. The ADRs pay a dividend of 3.43% and sell with a trailing 12-month price-to-earnings ratio of 9.95.

The process of remaking Vale’s structure isn’t simple and won’t be quick. This week the company approved a plan that would convert all classes of stock to a single class with full voting rights. Under the plan holders of currently non-voting shares can convert their non-voting preference shares to ordinary shares at a discount of about 7%. If 54.09% of shareholders of preference shares vote to convert their holdings to ordinary shares within 45 days, then the conversion of all shares to ordinary shares will go into effect

Currently Valepar, the shareholder group that consists of those Brazilian pension funds and those two financial institutions, holds 53.35% of Vale’s voting shares but owns just 33.12% of all shares.

After a successful conversion, Vale would move to a listing on the Novo Mercado, a broad on the Brazilian stock market that requires higher corporate governance standards than the main board in Sao Paulo.

Given the political turmoil in Brazil and the company’s exposure to international iron ore prices, any buy of Vale is risky. But I’d look to be a buyer with new money if this share conversion goes through on the idea that this change in Vale would give the stock reason to rally despite those risks.